The stock market's line in the sand—S&P 1700

With many traders at the beach, Wall Street's remaining bulls and bears will be skirmishing around the 1700 level on the S&P 500.

The coming week brings a flurry of economic reports: Retails sales, inflation data, and the Empire state and Philadelphia Fed surveys. There are a handful of earnings reports, including Wal-Mart, Cisco and Macy's, and the presidents of the St. Louis and Atlanta Federal Reserve branches will be speaking about the economy and monetary policy.

The stock market stalled out in the past week — it's worst weekly performance since June. The Dow was down 1.5 percent to 15,424, ending six weeks of gains. The S&P 500 gave back the 1700 level Wednesday, an important psychological and technical zone, just four sessions after first closing above it. The S&P was off 1 percent for the week at 1691.

"I think the market is sort of digesting. It's had a big move, and so it's digesting it," said Laszlo Birinyi, president of Birinyi Associates. "My real concern will be when people start selling into strength. I would be concerned if people are very quietly leaving the poker table. That's not happening. We were up six weeks in a row — should we jump up and down and get nervous because it's not seven?!"

Birinyi raised his S&P target this past week, after the index crossed above his previous target of 1700. He does not see a correction in the cards, but said the market could "correct" by going sideways for a period of time. He expects to see 1740 by year end.

"We think we have a summer lull. That doesn't concern me. The market's actually doing fairly well, given the circumstances. There's nothing going on in Washington, Europe is quiet," he said. "We have an almost normal August." Birinyi said anecdotally it seems like more Wall Street professionals are away this August, based on what seems to be a lighter volume of market calls and research reports.

Based on a study of market volume, there certainly is something going on — rather, not going on — this August. The volume for the week in S&P 500 stocks was 9.3 billion, the lowest weekly volume of any August since 2006 — before the financial crisis. The only lower volume this summer was during the Fourth of July four-day holiday week. And last summer, the only time volume was below 10 million was during four-day, holiday-shortened weeks.

Art Cashin, director of floor operations at UBS, sees something else behind the low volume. He said the market is stalled out due to the debate about what the Federal Reserve will do this fall about its quantitative easing program. Fed officials have said they could reduce the $85 billion in bond purchases as soon as September, if the economic data supports it.

"Part of it is structural — the ETFs and whatever," said Cashin. " I think people are just cautious of where we are — the new highs. The breadth of the market is a little strange." Cashin said traders are waiting for more information on the Fed, and also on who will run the Fed when Chairman Ben Bernanke retires at year end.

A number of Wall Street strategists have year-end targets for the S&P just around 1700, and some have been raising them. David Bianco, chief U.S. equity strategist at Deustche Bank, was at the high end of estimates when the year began, but he maintains his 1675 target as others pass him by.

"I think the stakes are high for September, October. That's when the volatility could get very high, and it's going to be the make or break period of the rest of the year," he said.

Even as Fed officials continue to talk about reducing the Fed's purchases of Treasury and mortgage-backed securities, bond yields and the dollar are off the summer's highs. The dollar index lost another percent in the past week, and the 10-year Treasury was yielding 2.58 percent. Foreign exchange strategists say the dollar weakness results in part from assurances from Fed officials that they are not going to raise short-term rates anytime soon and that the unwind of quantitative easing will be slow, and based on the economy. The dollar was also down more than 2.7 percent against the yen for the week.

Once the Fed gets closer to tapering back its bond buying, they see rates rising along with the dollar.

"The dollar dialed back on the weaker-than expected jobs report on the idea they won't do anything now. If they surprise and do something in September, I think the dollar will take off," said Win Thin, senior currency strategist at Brown Brothers Harriman. The dollar was firmer Friday, after falling since the release of the July jobs report a week earlier.

Bianco said stocks may react to rising yields, which he sees at 3 percent on the 10-year by year end. But for the balance of August, some bond strategists see rates holding at current levels and possibly moving lower.

The question for investors is whether the economic data, which has shown some signs of improvement , will be strong enough to counter the pull back in Fed easing. "Just as people were beginning to realize how lousy non-financial company earnings were, we got some rays of hope," said Bianco. He pointed to the surprising strength in the ISM manufacturing data and trade numbers.

John Stoltzfus, chief market strategist with Oppenheimer Asset Management, said he doesn't expect the Fed to begin tapering until December or early next year. "The economic data has been remarkably supportive in the last few days, but it has only been a week since we had that weaker-than-expected nonfarm payrolls that made everyone think it's not September."

"I think we've probably got a touch of the summer doldrums here, a testing period ahead of September, with the thought that some people think the Fed will begin tapering in September," he said. "The general direction is higher and the market wants to do that ahead of the Fed. You also have the reality that when the Fed starts tapering, you'll have the Fed tapering and you'll have the market anticipating further tapering. So people who are in bonds are going to feel more heat in terms of bond prices."

Stoltzfus said he does expect to see that the economy is improving, and stocks are setting up for a longer term bull run, as they did in the early 1980s.

"It's a process that will take some time so there is opportunity for people to join, get on the train and benefit from it. We do think the greater risk is to bond prices, as yields normalize and that equities still look attractive on a relative basis," he said.

"We continue to like financials and consumer discretionary stocks, even with retail getting jostled by the back to school crowd that seems a little cautious on the buy," he said. "We continue to like industrials with the numbers coming out of China. Last week, we had a trifecta with improving manufacturing data coming out of China, the U.K. and the U.S."

Besides U.S. data, investors will be focused on euro zone GDP Wednesday. Europe's stock markets have been outpacing the U.S. market lately one expectation the economy is improving.